The New Gaming Industry, Seen From the Inside

Ask the average gamer to name a video game producer, and Majesco Entertainment (NAS: COOL) is unlikely to be the first choice. According to Majesco CEO Jesse Sutton, that's about to change.

With just $116 million in trailing sales, Majesco is more comparable to Glu Mobile (NAS: GLUU) (who mobile?) than to industry giants Activision Blizzard (NAS: ATVI) or Electronic Arts (NAS: ERTS) . We're talking about orders of magnitude here, as Activision's sales add up to 41 times Majesco's.

But as Sutton told me in an exclusive phone interview, "We're probably the best positioned for growth in the interactive entertainment industry." And he walks the walk, too. Majesco is currently growing sales at 43% a year while Activision is fighting for a 5% gain and EA shrinks. Moreover, the company is profitable and much of the competition just isn't.

What's more, the stock can be found in the deep-discount bin despite this rampaging growth. Trading at just 0.5 times trailing sales and 5.3 times forward earnings, you'd be hard-pressed to find a better deal anywhere -- and particularly in the troubled gaming market.

The secret sauce
So what's driving Majesco's recent and projected success? In short: motion-based games.

Majesco's biggest hits all make extensive use of motion-tracking game controllers like those Nintendo (OTC: NTDOY) Wii remotes and the hands-free Kinect systems for the Microsoft (NAS: MSFT) Xbox 360. Led by hit franchises Jillian Michaels' Fitness, Zumba Fitness, and Cooking Mama, Majesco is establishing itself as a leader in this suddenly red-hot gaming genre.

Sutton is particularly happy about his success with the Kinect system, because that's where the money is. "Kinect is the right platform to be on in a big way for probably the next 14 to 18 months," he says. Next year's refresh of the Wii platform also looks promising and Majesco is already developing games for the Wii U, but Kinect is already a proven winner that's still growing its user base in an explosive manner.

The big ticket
I had to ask if Kinect and these dance-and-fitness game types mightn't be headed for a future as grim as Rock Band and Guitar Hero. The music-game genre blossomed quickly into a billion-dollar market but had no staying power, and both EA and Activision have essentially killed their franchises already.

Sutton went right back to the Kinect argument: "The fundamental difference here really is the Kinect platform and how it recognizes your entire body -- and the inability to cheat. You have to engage in the experience."

Expanding on the market opportunity, he added: "Billions of dollars are spent on exercise and fitness DVDs. The next level of fitness truly is the interactive experience -- a lot more engaging, a lot more involved, and has the ability to track you and analyze how well you're doing. It's as close as you can get to going to the gym and having fun with your friends."

And it's cheaper than a personal trainer, I might add. These games tap into two of the three biggest industry trends by being both social and physical -- work up a sweat and share your achievements with friends on the Xbox Live network or Facebook. The missing ingredient for a perfect cocktail at this moment in gaming history would be mobility. Cooking Mama fills that niche nicely, but Zumba is a tougher fit.

The investment opportunity
There's no doubt that Majesco is an up-and-comer in this rapidly changing sector. Smartphones and browser-based games are eating into traditional strongholds like handheld and TV-based consoles; Majesco sidesteps some of that volatility with a focus on motion gaming and becomes a part of the social revolution in other ways, as already discussed. Whether it's Zynga or Apple (NAS: AAPL) that's killing video games at the moment, Majesco is in a good position to make it into the new era.

"We think we are a fantastic investment for the investment community -- especially now," says Sutton, and I see his point. This mix of low share prices and high growth is pretty rare.

That's not to say that everything is smooth sailing for Majesco. This is still a small fish in a big pond, even if that pond is transforming as we speak. Being tiny comes with a few advantages, such as nimble reactions to changing markets and a potentially outsized return on your invested dollar if the company ever makes it to the big time.

But there's something to be said for massive resources and household brand names. Majesco faces a steep climb on those fronts. Also, the freshness of the Kinect could be fleeting and the Wii U might fail to catch the gaming community's imagination. These are very real risks, and only time will tell how Majesco will handle them.

Keeping all of this in mind, I'm still impressed by the favorable risk-to-value equation I see in Majesco's shares, and that's why I just placed an "outperform" call on the stock in our CAPS system. My All-Star CAPS rating could use a boost, and I think Majesco will help me over the next couple of years.

Follow in my size 13 footsteps by clicking here, or just add Majesco to your Foolish watchlist to follow the company without making a commitment. When the time is right to take action, you'll be the first to know.

At the time this article was published Fool contributor Anders Bylund holds no position in any of the companies discussed here. He has traded in his plastic guitar for a real six-string, and now plays more dance games than Guitar Hero. The Motley Fool owns shares of Microsoft, Apple, and Activision Blizzard. The Fool owns shares of and has written calls on Activision Blizzard.Motley Fool newsletter serviceshave recommended buying shares of Activision, Apple, Microsoft, and Nintendo. We have also recommended creating a synthetic long position in Activision Blizzard, as well as bull call spread positions in both Apple and Microsoft. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. You can check outAnders' holdings and a concise bio, follow him onTwitterorGoogle+, or peruseour Foolish disclosure policy.

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